Table of contents

• What are classic chart patterns?

• flag shape

  • bullish flag

  • bearish flag

  • pennant

• triangle

  • ascending triangle

  • descending triangle

  • symmetrical triangle

• Wedge

  • rising wedge

  • falling wedge

• Double top and double bottom

  • double top

  • double bottom

• head and shoulders pattern

• reversal head and shoulders pattern

• Summarize

What are classic chart patterns?

There are many different ways to analyze financial markets using technical analysis (TA). Some traders utilize indicators and oscillators, while others base their analysis solely on price action.

A candlestick chart shows a historical overview of price over a period of time. The idea is that by studying the historical price behavior of an asset, repeating patterns may emerge. Candlestick patterns can provide useful information about charted assets, and many traders try to take advantage of this in the stock, forex, and cryptocurrency markets.

Some of the most common examples of these patterns are collectively known as "classic chart patterns." They are a subset of well-known patterns that many traders consider reliable trading indicators. Why is this happening? Isn’t trading and investing all about finding an edge in areas that others overlook? That's true, but it's also about herd mentality. Since technical patterns are not governed by any scientific principles or laws of physics, their effectiveness depends largely on the number of market participants paying attention to these patterns.

flag shape

A flag is an area of ​​consolidation that goes against the long-term trend and usually occurs after a large price move. It looks like a flag on a flagpole, with the flagpole representing the momentum move and the flag representing the consolidation zone.

Flags can be used to identify potential continuations of a trend. The volume that accompanies this pattern is also important. Ideally, momentum moves should occur during high volume periods, while consolidation phases should have lower and declining volumes.

bullish flag

Bullish flags occur in an uptrend, following a sharp move higher and usually continuing further higher.

bearish flag

Bearish flags appear in a downtrend and follow a sharp decline, often followed by further declines.

pennant

The pennant is basically a variation of the flag, where the consolidation area has an approaching trendline that is more similar to a triangle in shape. The pennant is a neutral form; its interpretation depends largely on the specifics of the pattern.

triangle

The triangle chart pattern is characterized by a converging price range, usually followed by a continuation of the trend. The triangle itself will show a pause in the underlying trend, but may also indicate a reversal or continuation of the pattern.

ascending triangle

An ascending triangle forms when a horizontal resistance range and an ascending trendline appear between a series of higher and higher lows. Basically, every time price bounces off horizontal resistance, buyers step in at higher prices, creating higher lows. Because the resistance range gradually becomes tense, a final price breakout often quickly leads to a high-volume spike. Therefore, the ascending triangle is a bullish pattern.

descending triangle

The descending triangle is the reversal pattern of the ascending triangle. A descending triangle forms when a horizontal support range and a descending trendline appear between a series of lower and lower highs. As with the ascending triangle, every time price bounces off horizontal support, sellers step in at lower prices to create lower highs. Typically, once price breaks out of a horizontal support range, a rapid decline on high volume follows. It is therefore a bearish pattern.

symmetrical triangle

A symmetrical triangle consists of a descending upper trendline and a rising lower trendline, both with roughly equal slopes. The symmetrical triangle is neither a bullish nor a bearish pattern, as its interpretation depends heavily on the circumstances (i.e. the underlying trend). It is considered a neutral pattern in itself and represents only a period of consolidation.

Wedge

A wedge is composed of approaching trend lines and represents tightening price action. In this pattern, the trendline shows highs and lows rising or falling at different rates.

This could mean a reversal is imminent as the underlying trend is weakening. A wedge pattern may be accompanied by a decrease in volume, which also indicates that the trend may be losing momentum.

rising wedge

The rising wedge is a bearish reversal pattern. It indicates that as prices tighten, the uptrend becomes weaker and weaker and may eventually break out of the lower trendline.

falling wedge

The falling wedge is a bullish reversal pattern. This indicates that the trend line is tightening as tensions are building downwards. A falling wedge usually results in an upward breakout momentum move.

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Double top and double bottom

Double top and double bottom patterns occur when the market moves in an "M" or "W" shape. It is worth noting that this pattern can be classified even if the relevant price points are not exactly the same, but simply close to each other.

Typically, two lows or highs should be accompanied by higher volume than the rest of the pattern.

double top

A double top is a bearish reversal pattern where price reaches a high twice but is unable to break higher the second time. Meanwhile, the pullback between the two highs should be milder. This pattern is confirmed once the price breaks out of the retracement low between the two highs.

double bottom

A double bottom is a bullish reversal pattern where price holds low twice and eventually continues to a higher high. As with the double top pattern, the pullback between the two lows should be mild. This pattern is confirmed once the price reaches the higher high of the bounce point between the two lows.

head and shoulders pattern

The head and shoulders pattern is a bearish reversal pattern that has a base line (neckline) and three peaks. The two peaks on either side should be roughly at the same price level, while the middle peak should be higher than the other two. This pattern is confirmed once the price breaks through the neckline support.

reversal head and shoulders pattern

As the name suggests, this is a reversal pattern of the head and shoulders pattern and therefore, it indicates a bullish reversal. A reversal head and shoulders pattern forms when price makes lower lows in a downtrend, then rebounds and finds support at roughly the same level as the first low. This pattern is confirmed once the price breaks above the neckline resistance and continues higher.

Summarize

Classic chart patterns are among the most well-known technical analysis patterns. However, like any other market analysis method, they should not be viewed in isolation. What works in one specific market environment may not work in another specific market environment. Therefore, it is always good practice to seek confirmation and at the same time engage in appropriate risk management.

If you want to learn more about candlestick chart patterns, please read "12 Popular Candlestick Chart Patterns Used in Technical Analysis".